A recent report by Investec Investment & Wealth has indicated that nearly a third of parents are not willing to offer an inheritance or financial aid to their married children due to the fear of divorce. As divorce is becoming increasingly commonplace, it is an understandable concern for many people planning their family's future inheritance.
Sylvie Wade is a retired widow with one child, Albert. Albert is married with two children and has a child from a previous relationship. Sylvie is worried that should Albert divorce, some of her inheritance could go to his wife. Sylvie would like to ensure her grandchildren are going to see the benefit of her inheritance.
We would advise Sylvie to consider setting up a discretionary trust in respect of her three grandchildren, which would allow money to be bequeathed to them when they reach a certain age.
A Discretionary trust allows you to transfer assets such as cash, property and shares to designated trustees holding the assets on behalf of the beneficiaries. A 'discretionary trust' trustee is responsible for looking after the assets and making suitable investments and for making decisions on when to make capital and income payments to beneficiaries. The discretionary trust is a flexible choice, as it allows you to distribute the assets as you wish.
Grandparents can create a trust for their grandchildren during their lifetime or on their death. Each grandparent can put £325,000 into the trust (£650,000 per couple) with no inheritance tax charge.
A discretionary trust is liable to UK income tax at 45 per cent for foreign dividends and at 37.5 per cent for UK dividends. Transfers to discretionary trusts are chargeable transfers for inheritance tax purposes, however, there are allowances and reliefs available for transfers to discretionary trusts. Chargeable transfers are taxed at 20 per cent for sums over £325,000, however, if the Trust settlor (the person who created the trust) dies within seven years of the transfer, a further 20 per cent may be taxed.
One of the benefits of a discretionary trust is the funds are not counted as being held in the IHT estate and therefore have their own IHT taxing regime. The trust will be taxed on anything over £325,000 every ten years on the market value of its assets at a rate of 6 per cent.
We understand modern family set ups can be complex and you may have concerns about your inheritance. With careful planning, and specialist advice, you can be assured your loved ones’ future is secure and your inheritance can be distributed according to how you think is best for your family.